Geoffrey C. Arrobio Interview

#1–How did you get into commercial real estate, and what led you to Matthews?

While in grade school, one of my closest friends was Christopher Rising (who now runs Rising Realty in Los Angeles), his father, Nelson Rising, was a commercial real estate developer at the time with Maguire Partners. I was enamored with his professional work, developing skyscrapers in downtown Los Angeles (Library Tower, The Gas Tower, and Playa Vista, located south of Marina del Rey). He was an astute developer and a thoughtful statesman, creating relationships with the community that would allow development projects to garner City approval. I studied Real Estate Financing and International Finance at the University of Southern California. I thoroughly enjoy the development process and watching projects mature into functioning cash-flowing assets that also add value to the community, so I learned to develop a relationship with borrowers and lenders during my years at Johnson Capital, which eventually led me to Matthews after working for Walker & Dunlop post acquisition of Johnson Capital.

#2–Which sectors are experiencing the highest level of lending activity amidst the current market volatility?

All sectors of real estate are active users of capital today, multifamily, office, medical office, retail, self-storage, manufactured housing, industrial, hospitality, Build for Rent (“BFR”) assets, and the like. All have a need for capital during these higher interest rate periods. Unfortunately, the users of capital have had to “adjust” the higher interest rates, both short-term and long-term borrowing, due to the Federal Reserve increasing the overnight lending rate by 500 basis points over a short period of time (affecting Prime and SOFR rates), in addition to the Bond market adjusting for inflationary pressures (Treasury Yields adjusting higher).

However, lenders (capital providers) are more interested in lending on assets unaffected by inflation or rather would like to provide capital to those assets where inflation has increased rents and where assets have retained value. These assets include multifamily, industrial, grocery-anchored retail, manufactured housing, and BFR assets. Office is currently experiencing a dearth of lending actively due to higher vacancy rates and underwriting (cash flow) issues. Hotel assets are another asset class where lenders are weary and have restricted access to affordable capital.

#3–How do you see the California commercial real estate industry evolving in the next five years?

California does have some bright spots and some issues as well. Downtown Central Business (“CBD”) districts continue to reel from the COVID-19 era, where in-office workers continue to work from home, leaving many office buildings with exceedingly high vacancy rates, affecting CBD retail and hospitality. However, the suburban areas of California are experiencing higher occupancy rates for most asset classes. Over the next five years, I would like to see workers return to the office. However, current policies regarding homelessness within the CBD districts need to change over the next five years for workers and visitors to re-colonize the downtown area.

Due to existing housing shortages throughout the State, I do see continuing demand for multifamily housing units, both market rate, affordable housing assets, and BFR assets. Industrial assets should also remain attractive over the next five years as we start to come out of this higher inflationary period. Long Beach and Los Angeles ports continue to be the main gateway for import distribution throughout the United States. Suburban self-storage will also do well as household formation grows within these areas.

#4–How are you advising those in the current lending environment?

I am advising my clients to be patient as we navigate through these turbulent times. Short-term rates are currently 250 to 300 basis points above long-term fixed borrowing rates due to the inverted yield curve and the Fed raising the overnight lending rates affecting short-term borrowing rates.

For clients who are actively developing and need construction financing, I advise them that lenders will need a depository relationship and ample liquidity and net worth to qualify. Construction lending is a challenge today; however, we are getting deals closed by advising clients on which lending sources are most active in addition to managing expectations.

For clients looking for fixed-rate long-term financing instruments, there remains ample liquidity, however, at higher rates than 12 months ago. Communication is crucial during these times with clients. Managing client expectations and providing “real-time” financing options is key to achieving successful closings. Additionally, fixed rates within the five or six percent ranges today are historically rather low compared to other inflationary periods of time. The times of three and four-percent fixed rates have come and gone. Will they reappear, maybe; however, not within the next three-year period, in my view.

#5–How has raising funds changed in the current market?

First of all, there are fewer lenders in the marketplace than there were several years ago; access to capital has certainly changed in that regard. Money center banks are only lending to existing clientele, aside from a select few. Regional lending sources have also gone offline or have ceased all operations (First Foundation, Zions, PacWest, etc.)

The challenge today is securing the right source of capital for the client. It is taking more time to source these assignments than in normal “risk on” periods of time. In addition, when are actively advising clients regarding where existing lenders’ underwriting requirements when it comes to loan to value, debt service coverage, and debt yield requirements. Again, it comes down to communication and managing expectations.

#6–Can you provide examples of successful transactions where you were able to secure favorable financing terms for your clients? What strategies did you employ in those cases?

I have been working on several permanent financing assignments in addition to construction loan assignments, most recently for self-storage assets.   I was able to secure construction financing for a client whose primary depository bank currently went offline with their commercial real estate construction loan programs. The client was left with several loans under application with this lender while they pulled all their construction applications and commitments. My assignment was to “clear the market” for new self-storage construction lenders who were also viable financially so that my client would not run into the same situation. I was able to secure financing for all of my client’s projects at reasonable rates and at the debt levels needed to move these projects forward.

The strategy I used to secure these financing assignments was to create a loan deck that explained a concise and positive story to the lender. The loan deck created was detailed and explained everything about the client, their 40+ year history in the business, the successful projects they have completed in the past, and the viable economics of the project and the surrounding community. All of these factors, plus understanding the intimate details of the transaction, allowed me to secure the right financing structure for my client. Being an advocate for your client is tantamount in this market if you want to secure the best financing structure.

#7–Can you provide any strategies for maximizing the value of commercial real estate investments through effective financing?

Knowing the capital market’s sources of capital is extremely important in providing value to our clients. Keeping them up to date regarding what capital providers are able to do and understanding their programs are important when strategizing financing assignments within tight fiscal lending environments. Staying informed and understanding the economic outlook are also key factors. Knowing where rates are going (especially for fixed-rate assignments) is of considerable value to clients when advisors are conversing with clients about existing or future assignments. Providing all of the existing market data points to clients so that they can make informed decisions regarding financing decisions is key. Taking advantage of lower rates, when they occur, adds considerable value to clients as well, so having the property data up front and creating a solid financing deck ready to hit the market are ways to stay ahead.

#8–What advice would you give to individuals or businesses looking to secure financing for their commercial real estate projects? Are there any common mistakes or misconceptions you often encounter?

Borrowers/clients are very busy executing their real estate business plans and are not always in the financial markets, nor do they understand what the capital markets are doing on a day-to-day basis. They may be in the market once or twice a year at best. Advisors like ourselves are in the market every day, and we understand what projects are getting favorable financing on a daily basis. So, my advice to clients and small business is to stay in touch with their advisor and provide information for upcoming financing assignments so that when the time comes for needed financing for that project, we will have an ample amount of time to clear the market and secure the most favorable financing for that assignment.

The most common mistake I see is not providing enough time to process (underwrite) a project from the time an application is signed to closing. The closing process with lenders today has expanded to what we are normally used to. Lenders today are taking 60 to 70 days to close a transaction, whereas normally, it would take 45 to 60 days. The reason behind this is that lenders are being very meticulous with their underwriting process and are either asking for more information from the client and/or are having the deal vetted by additional credit decision markets with the firm. So be prepared for transactions to take longer from start to finish.

#9–Any advice for new agents entering the CRE industry?

My advice is to stay informed and read everything, especially the commercial real estate trade periodicals, in addition to staying informed from a macroeconomic point of view. Commercial real estate is affected by the current economic environment, not only from a monetary policy standpoint but also built from a demographic and household formation standpoint. Understanding the markets you are working in is also extremely important. Understanding the demand drivers, population trends, wage growth, and inflation rates and why these factors affect real estate will make you a more effective advisor. Understanding your clients’ needs and goals is also very important when strategizing for a financing assignment. And lastly, being professional and courteous are also very important traits for new advisors. You will always learn something new in this business, and you will also experience hardships. Learn from both and stay humble.